Lenders cut mortgage rates to lure expats as housing market shows signs of bottoming out
After three years of renting a villa in Dubai, French engineer Philippe Bakhos has decided to buy.
The 38-year-old is taking advantage of some of the lowest interest rates ever offered in the United Arab Emirates to purchase a three-bedroom villa for 2.5 million dirhams ($680,661) in “The Springs,” a development about 20km from the center of the city.
Bakhos went to Barclays and HSBC Holdings before securing an AED2m mortgage from Mashreqbank, a local lender.
“With property prices and interest rates so low, it makes sense to buy,” the father-of-two said in an interview. “With the money I’m spending in rent each month, I can make repayments on a mortgage.”
International and local lenders are cutting mortgage rates to attract expatriates such as Bakhos amid signs house prices in the emirate may be bottoming out after dropping 64 percent from their peak in the middle of 2008. Property agent Better Homes says home sales rose to a 12-month high of 116 in July, typically the slowest time of the year, from 38 in January
Mashreq, controlled by the Al Ghurair family, is offering Bakhos a 5.49 percent interest rate and an 80 percent loan-to-value ratio with no early payment penalty. The same villa cost AED4.4m at the height of Dubai’s property boom, according to Dubai-based broker Better Homes.
Standard Chartered Plc is offering the lowest interest rates in the UAE at 4.99 percent. HSBC Bank Middle East Ltd., the Dubai-based unit of HSBC, Europe’s biggest bank, has cut mortgage rates to as low as 5.49 percent from a high of 9.5 percent in 2009. Rates at Barclays range from 5.35 percent to 7.75 percent depending on the loan-to-value ratio.
“Banks weren’t booking significant volumes at the higher levels so slashing their rates means they’ll start to compete,” said Raj Madha, a Dubai-based analyst at Rasmala Investment Bank. “With the labour market stabilizing and property prices beginning to find a floor, banks are realizing that mortgages are a comparatively safe place to lend.”
The three-month Emirates interbank offered rate, the level at which banks in the UAE lend to each other, has dropped 31 percent, or 66 basis points, since the beginning of April, to 1.47 percent on August 8, the lowest since Bloomberg began collecting data in September 2006.
The rate reached 4.79 percent in October 2008 after the collapse of Lehman Brother Holdings triggered the worst economic slump since the 1930s Great Depression.
“It’s not surprising that rates are coming down because EIBOR rates have eased this year,” said Shabbir Malik, UAE banking analyst at investment bank EFG Hermes. “The UAE’s banking system as a whole has become more liquid.”
International lenders are looking to capture market share from local mortgage providers such as Tamweel and Amlak, which provided almost 90 percent of all mortgages in the UAE by mid-2008. Both companies halted lending in October 2008 after the property market collapsed.
Tamweel resumed operations in January and now offers a 25- year, 80 percent Islamic mortgage at 5.25 percent profit rate to buyers in selected areas.
Overseas banks may be able to take business from domestic firms because their cost of funding is lower, allowing them to offer cheaper mortgage rates, Malik said.
“Rates offered are a function of the cost of borrowing for the bank,” said Thimal Parera, Barclays’ product director of consumer banking in Dubai. “Current rates in the market reflect the lower cost of borrowing prevailing in the market.”
International banks may also be boosting mortgage lending after regulators limited personal loans, according to Varun Sood, acting chief executive officer of Tamweel.
In February, the UAE’s central bank capped personal loans at 20 times a borrower’s monthly salary to control lending and curb charges.
Property prices in Dubai, the second largest of the UAE’s seven sheikhdoms, have still dropped 64 percent from their peak in mid-2008, while rents have fallen 55 percent, Deutsche Bank said.
Mortgage demand has plummeted since the days of Dubai’s property boom, when speculators bought yet-to-be-built homes and sold them at a profit before a single brick was laid. The number of mortgage transactions was at 396 worth AED1.5 bn last month compared with 698 transactions worth AED6bn in July last year, according to Reidin.com, a research firm that tracks the UAE real-estate market.
Dubai’s home prices are expected to decline further as 54,000 homes, or about 15 percent to 20 percent of the existing supply, comes onto the market from 2011 to 2015, Jones Lang LaSalle estimates. The impact of lower interest rates and new visa laws isn’t expected to kick in until later in the year, analysts said.
Non-performing loans at banks in the UAE are expected to peak at about 12 percent this year from a range of 8 percent to 10 percent in 2010, Moody’s Investors Service said March 7.
“Any risk of fierce rates competition between banks is compensated by the renewed interest this competition is creating in the real-estate market,” said EFG’s Malik. “This should stabilize the real-estate market and as a result reduce the risk of non-performing loans for all banks.”
Most of the mortgage transactions last year were to refinance existing loans, while the majority of loans this year are for new purchases, analysts said.
“The majority of buyers we’re seeing now are well-paid expatriates having lived here a fair amount of time,” said Independent Finance’s Wani.
“Over the years, they have spent huge amounts of money on rent and would now want to use this money to build property equity while they are here.”
I wouldn't advise anyone to go to Barclays. I got a mortgage in 2008 and we signed an agreement saying I would get a 245 basis point discount on there tracker rate for the life of the mortgage. A year later they moved me to the tracker rate and that piece of paper magically disappeared from their records. Since I'm heavily underwater on the mortgage its not really feasible to move.
I'm sure other people have had the same issue with other banks.
Interesting I would have thought that AED 2.5 million for a 3 bedroom villa in the Springs was way above market rate, whilst we may not be quite comparing apples with apples, a 3-bedroom repossession in the Springs was auctioned by a bank 3 to 4 months ago for AED 1.2 million.
Also I would have thought renting was much cheaper in terms of monthly outlay even at the reduced interest rates, given today's rental rates.
Still one factor that has been true throughout the history of Dubai's freehold market, if you took the attitude that any property bought was a savings scheme only, not a money maker, then there was clear motive. Merely base your savings scheme return on the rent you had saved and assume that you may get back exactly what you paid for the asset when it comes time to move on and sell up.
At the moment negative equity prevails because of the price many people paid toward the top of the cycle, had you bought at the beginning then you are still in positive profit territory.
Since you seem to be an owner, could you share your experience on where one could find value for money properties ?
My guess is that today's Dubai property values will look expensive in 5 years time. There are still too many factors stacked against the sector here. The global correction and credit contraction is still going to deliver some surprises yet. I recall how disbelieving people were of how high values soared in the boom...so let's wait for values to fall to "unbelievable" levels before having any confidence that the bottom has been reached.
I strongly believe that this is attempt to get consumer confidence back in for property market. For the past few days you can see article on property quoting unrealistic prices for properties and promoting various financial and consultancy institutions. What they don't mention anywhere is the ridiculous services charges that you pay monthly/yearly per sq/feet. Depending on the property size, you ending paying much more that renting a villa or apartment. Needless to say, there is still no clarity on the ownership side.
Might I raise a statistical question here. There is a reference in this article to a set of mortgage transaction figures provided by researcher Reidin.com, for the month of July 2011, they recorded 396 transactions with a total value of AED 1.5 billion.
At another point in the article there is a reference to figures supplied by property agency Better Homes who say that the number of properties sold in July 2011 is 116.
These are contradictory values to a lay person, which beg some questions:
1) How can the number of mortgage transactions recorded in July be almost three and half times the number of properties sold?
2) If that can be the case, then what constitutes a mortgage transaction - an approval, a signed agreement, when the mortgage physically kicks in, when the title of a mortgaged property is registered with RERA or a change of terms fixed to tracker rate? A combination of all or some of the above?
3) Is title registration of mortgaged property running retroactively?
Another thought 396 mortgage transactions in a market containing 330,000 freehold properties and still rising that's a 0.12 per cent salest total market turnover, that's if the transactions are all sales? That does not indicate a recovering market to anybody
I would also be interested to see how many of those 330,000 properties are currently for sale on the market, take the agency quoted figure 116 units sold in July and apply the same calculation. That is a total markets turnover of 0.035 per cent.
Sadly the second coming of financial mayhem in Europe and North America is not going to help ease the quandary in Dubai.
2.5m villa, he puts 20% down and borrows the rest (2m).
Interest rate of 5.49%. That means annual interest alone is 109,800 AED. Service charges on top and maintenance, probably total around 120k AED per year.
You can rent a 3b+s in the springs for that, according to Dubizzle. Lots of choice.
And just to clarify, this is calculating PURELY the interest on the loan. No repayments at all, no equity being built up.
I do hope people look beyond the cliches of 'rent is wasted money' when looking into important decisions like this. Interest is wasted money too....
Important to note that these rates are only for new borrowers. When I asked my lender for a reduction from the current 8.5% they declined. Only after repeated calls did I get a reduction of 0.5% which is still a clear 2.5% more than they are offering to new borrowers. That's our reward for loyalty!
If it was only the ineterst rate problem, it would be ok. Like underlined by Red Snappa there are many other variable to take into account before taking this big step. Utilities cost, service charges and is the project completly finished? is there any surprise in the books by the developer to change the master plan, is the developer still in charge for the maintenance or is there a strong owners association? Under todays situation is not recommended to purchase anything in Dubai. The best is to keep renting. if you dont like something, just move out.